How Much Should a Corporation Earn?

Exhibit I

Part A. GNP and plant and equipment expenditure data are quarterly data seasonally adjusted at annual rates, obtained from Survey of Current Business, U.S. Department of Commerce.

Part B. The plant and equipment investment includes nonresidential, nonfarm producers’ durable equipment and structures. Total private corporation profits after taxes and plant and equipment investment were obtained from the Economic Report of the President. Pre-1929 data are from the U.S. Department of Commerce.

Part C. External sources include stocks, bonds, mortgages, and bank and other loans. Internal sources include undistributed profits, capital consumption allowances, trade payables, taxes on profits, and other liabilities. Total sources equal external plus internal. The information was obtained from Survey of Current Business, U.S. Department of Commerce.

Exhibit II

Information was obtained from Capital Goods Review prepared by the Machinery and Allied Products Institute, Washington, D. C. The data refer to all corporations. Amounts are estimated at 1964 prices.

Exhibit III

Debt ratios are based on information published in Moody’s Industrial and Public Utility manuals and companies’ annual reports. Bond yields are from Moody’s bond surveys and exclude telephone issues. The Bell System bond yield index is maintained by the AT&T Company and is composed of 10 issues considered representative of all System long-term issues with respect to maturity, coupon, size of issue, and so forth. It is constructed on the same basis as Moody’s industrial and utility bond yield indexes.

Exhibit IV

The data for the 528 manufacturing companies shown in Parts A, B, and C are drawn from the “Compustat” industrial companies series magnetic tape provided by Standard & Poor’s. The tape was processed by an IBM 7074 computer to derive the data used here.

The companies represent a broad-base series having consistent and meaningful data. Certain industries (e.g., mining and oils) which have depletion allowances are excluded because comparability would be difficult. Some other companies are excluded where data are incomplete.

The data plotted on the charts are the average of the annual returns on average common equity for the period shown. Thus, Borden Company, which had an average return of II.8% for 1946–1965, is represented in the 10%–12% bar in Part A. Similarly, it is one of the dots shown in the 10%–12% box for the food industry in Part C.

Return on equity capital rather than return on total capital (or total assets) is used to allow a direct and meaningful comparison of returns between the manufacturing industries and the electric industry. Differences in capital structure, as shown in Exhibit III, largely compensate for differences in basic industry risk so that the equity securities are regarded as comparable.

Accounting differences between companies (e.g., depreciation) are minimized by: (1) excluding the balance sheet item of deferred taxes and investment credit from equity capital; (2) using averages over a relatively long period; and (3) using a common data source (“Compustat”).

Exhibit V

Part A. Figures show rates earned on average common equity for the 528 manufacturing companies identified in Exhibit IV.

Part B. This chart was included in the Economic Report of the President, January 1966. GNP figures are seasonally adjusted annual rates. Unemployment figures are percentages of civilian labor force, seasonally adjusted. The potential GNP trend line increases at a rate of 3·5% from the middle of 1955 to the last quarter of 1962, and at a rate of 3·75% thereafter.

Part C. Plant and equipment expenditures are those previously identified in Exhibit I, Part A. GNP data were obtained from the Survey of Current Business. Pre-1929 GNP figures are from the U.S. Department of Commerce. Corporate profitability is shown as the rate of return on common equity for Standard & Poor’s 425 industrial companies (1946–1965) and 50 industrial companies (1929–1940). Data prior to 1929 are based on the earnings of the 50 largest manufacturers for which information is available. This series is maintained by AT&T and is based on information provided in annual reports.

Exhibit VI

The 128 electric companies represent a broad-base series having consistent and meaningful data. The data were gathered from Federal Power Commission reports, Studley Shupert & Co., Inc., Moody’s Investors Service, and annual reports, and were processed by computer in a method similar to that used by the 528 manufacturers. The companies in the series represent large operating electrics with capital of $10 million or more. The series excludes holding companies. 1965 data were not available for the electrics at the time data were processed.

Exhibit VII

Marriage data are from the National Center for Health Statistics, U.S. Public Health Service. Alaska and Hawaii have been included beginning in 1959 and 1960, respectively.

Population data are from the U.S. Bureau of Census. Series D projections were used for 1982–1985—Alaska and Hawaii being included throughout. Appropriate interpolations were made to obtain yearly data.